I wrote in March 2016 the then chancellor George Osborne may consider further reduction in the lifetime allowance (LTA) however he decided to leave this at the current level of £1m, for the time being, growing numbers of worker’s risk tax shocks because they are unknowingly on course to exceed this limit.
The taxman levies a 55pc charge on any pension savings beyond the lifetime allowance if you take the pension as a lump sum, or 25pc if withdrawn as an income. In the latter case, income tax would also be applied at your marginal rate.
There are annual and lifetime limits on the amount you can save into a pension. If you go over either allowance, HMRC claws back the tax relief added to all pension savers.
There is another danger – that some savers are blindly walking into. It concerns “protections” offered by HMRC that allow savers to retain the higher pension allowances of the past.
There are two types of protection – “Individual” and “fixed” – and a different version for each tax year.
The former can be applied for only if the value of savings was at least £1m in April 2016, when the allowance was lowered from £1.25m to £1m. You can retain the lower of your pension value at April 2016 or £1.25m.
There is no minimum pension value required for fixed protection, which also allows you to keep the £1.25m allowance. But making any new pension contributions after April 5, 2016 voids the protection and will see your allowance drop back to £1m.
The government has stated that the LTA would increase by CPI from 2018 however this looks to be up for a review following David Gauke’s comments;
The new DWP minister, David Gauke: stated on Wednesday 5th July that “I am not going to shy away from the fact that getting legislation through the House of Commons would be challenging”, referring to the governments weak majority “however that does give us the opportunity to now think about the long-term reform, and try to build on a consensus.
According to the updated ONS figures (feb-2017) the net cost of tax relief including national insurance savings by employers is currently £40.5b of which three quarters ends up in the hands of higher rate tax payers, that’s an increase of £5.0b since 14/15 tax year albeit some of this will be attributed to auto enrolment workplace pension schemes.
Office of national statistics:
Is there going to be any changes with the current limits?
In my opinion I can see that there would be cross party support on reducing the tax benefits to the wealthier pension savers as they take the lion’s share of the tax benefit, therefore some tweaking around both the annual allowance and lifetime allowance may be on the cards when Philip Hammond takes to the floor at the next budget.
Workers in their 40s and 50s with previous final salary type pension benefits are most at risk with rising markets, increased transfer values being offered from schemes and the complicated rules ,clients are totally unaware of what’s on the horizon. Getting advice on your current situation might just save you a small fortune.
*All your private pension savings count towards your lifetime allowance. The state pension is excluded from the calculation. You must add your “defined contribution” savings – which are the most common type of pension scheme – to any entitlements to a defined benefit scheme.